News Sinking Fund - Meaning, Types, Objectives, Advantages In Addition To Disadvantages
Sinking Fund:
A sinking fund is a fund which created for the role of repayment of liabilities (redemption of debentures) in addition to replacing fixed assets. Every twelvemonth a fixed amount either charged against net income or loss concern human relationship or appropriated out of the net income in addition to loss appropriation account. The same amount is remove from concern inwards each twelvemonth in addition to invested on investments. The involvement received on these investments is re-invested i time to a greater extent than to earn chemical compound involvement every year. When the debentures are due for redemption, the investments are sold in addition to debentures are redeemed. Any net income on sale of investment is credited inwards sinking fund concern human relationship whereas loss is demented to the same account.
Types of Sinking Fund
There are 2 types of sinnkng fund. they are:
1. Sinking fund for redeeming liabilities: it is created for the role of repayment of liabilities or redemption from its creations is knows equally sinking fund for redeeming liabities.
2. Sinking fund for replacing fixed assets: it is created for the role of replacing one-time assets past times creating fund of the fellowship at the terminate life of fixed assets is called sinking fund for replacing fixed assets.
Advantages or Objectives of Sinking Fund
The next wages or objectives of sinking fund are equally follows:
• It provided adequate fund for the redemption of debenture or other loans.
• It provides adequate fund for the redemption of one-time fixed assets at the terminate of its useful life for novel assets.
• It helps to invest inwards exterior securities which volition growth amount of reserve.
• It helps to keep potent to survive distributed to the shareholders.
Disadvantages of Sinking Fund
• It is impossible to collect sufficient fund for replacing one-time assets for novel immediately.
• It reduces the divisible net income to survive distributed to the shareholders.